Fed rate cuts could prove to be a boon for Southeast Asian economies

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A Thai investor checks an electronic board showing stock prices.

Amphol Thongmueangluang | SOPA Images| LightRocket | Getty Images

The U.S. Federal Reserve’s decision to cut interest rates in September, with further reductions expected, could prove to be a boon for the emerging economies of Southeast Asia.

“We’re very confident and optimistic with the rate cuts … these markets will come back to their 6-7% real GDP growth trajectory in the near term,” Saurabh Agarwal, head of Southeast Asia private equity at Warburg Pincus, told CNBC’s “Squawk Box Asia” last month.

His confidence is matched by economists and finance officials across the region.

David Sumual, chief economist of Bank Central Asia, said Indonesia is one such country that could take advantage of both short-term and long-term Fed policy.

“Further Fed cuts will benefit Indonesia mainly through commodity channels, given the potential rally in commodity prices, especially with the news of the upcoming Chinese fiscal stimulus. Indonesia may also benefit from higher portfolio inflows (especially for stocks), although the impact may be more limited given the renewed demand on the Chinese stock market,” he told CNBC.

Higher rates in the U.S. have traditionally been a negative for emerging markets as U.S. investors typically send their dollars home in search of decent yields. A key concern is also the pressure interest rate differentials put on currencies, and it can be a difficult time for emerging market central banks attempting to keep price rises in check.

But on the flipside, when U.S. rates ease, it can boost emerging markets who see renewed flows into their economies. Global commodities (a cornerstone of many emerging markets) also tend to rise in price as the U.S. dollar drops on a more dovish outlook by the Federal Reserve.

Indonesia’s surprise

In this current environment, the central banks of both Indonesia and Thailand are attempting to maneuver themselves in the aftermath of the recent Fed cut.

Indeed, hours before the Fed cut its benchmark interest rate, Bank Indonesia — the central bank of the country — announced its first rate cut in three years in what was seen as a surprise move.  

Speaking before the Fed rate cuts, Henry Wibowo, head of Indonesia research and strategy at JPMorgan, told CNBC’s “Squawk Box Asia” that “Indonesia, in Asia, is going to be one of the key beneficiaries of this portfolio flow” stemming from any U.S. cuts.

“If you look at the Jakarta composite index, one of the biggest sector drivers is the banking sector and we think that the banks will get portfolio flow coming in and that should, basically, help to boost their multiples,” he said. Trading multiples are used by finance professionals to gauge the value of a stock.

Interest rates in Indonesia have historically followed the Fed’s, Sumual added, thanks to closely linked global cash flows and currency fluctuations.

“Bank Indonesia tends to follow the Fed in cutting its policy rate, although [the] Bank of Indonesia (BI) could afford to cut the BI rate in the September 24 meeting before the [U.S.] Federal Open Market Committee meeting, due to the sharp appreciation in the Indonesian rupiah’s value,” he told CNBC.

Sumual added that the BI “may wait for more Fed cuts before resuming its rate cut campaign, as the central bank continues to seek balance over its pro-stability monetary policy and pro-growth macroprudential policies.”

Both Indonesia’s rupiah and Thailand’s baht currencies strengthened against the U.S. dollar following the Fed’s decision, thanks in part to investors shifting large sums of money from U.S. government bonds to Southeast Asia’s developing markets.

And it wasn’t just confined to the two countries. Both Malaysia’s ringgit and the Singaporean dollar also strengthened off the back of the Fed cut. On Sept. 29, the Thai baht reached its highest mark versus the U.S. dollar since early 2022.

Thailand’s dilemma

A strong currency has, however, left Thailand in somewhat of a dilemma.

Following the Fed’s decision, the country’s Commerce Minister Pichai Naripthaphan urged the Bank of Thailand to consider a cut to interest rates — already at 2.5%, one of the lowest in comparison to its neighbors. He cited the need to stimulate investments and alleviate the burden of household debt on ordinary Thai people, currently at 90% of Thailand’s GDP.

“Every time the U.S. raises or cuts interest rates, it affects the flow of capital in and out of Thai markets. When the U.S.’s policy rate goes down it would also cause the baht to strengthen, and vice versa,” Naripthaphan told local media in August.

The Bank of Thailand duly obliged, announcing a surprise cut for the first time in four years on Oct. 16.

In a report published in September, American credit rating agency Fitch Ratings said it expects the Fed to make four cuts through 2025. And U.S. central bank is still expected to make another reduction before the end of the year.

As for ASEAN, central banks look likely to be in step with the Fed. Sumual believes both Bank Indonesia and Bank of Thailand will “follow suit,” further benefiting ASEAN’s emerging market portfolio assets.


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